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Addressing the 'Illusory Allure' of Crypto: BIS Study Advocates Regulation Over Prohibition

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  • Developing nations heavily embrace cryptocurrencies due to their unstable exchange rates and limited banking accessibility.
  • Central bank officials from Latin America have restated their reservations regarding the unfulfilled potential of cryptocurrencies. However, they emphasize the need for regulatory oversight rather than an outright ban on the technology.

 

Crypto's attempts to mitigate financial risks in developing economies are proving ineffective, yet a consortium of central bankers spearheaded by Mexico and Colombia has asserted that the solution lies in implementing regulatory measures rather than an outright prohibition. This viewpoint was articulated on Tuesday.

Emerging economies have become favored destinations for individuals venturing into the realm of cryptocurrencies. The allure lies in the instability of their fiat currencies and the limited availability of banking services, which drives the search for alternatives to conventional financial systems. According to statistics from Chainalysis, a mere two out of the top 20 nations with the highest cryptocurrency adoption originate from developed economies. The majority of these top spots are occupied by countries such as Vietnam, Brazil, and India.

However, pledges to mitigate the effects of inflation or provide an affordable payment alternative are merely components of crypto's “illusory appeal,” as outlined in the research. Despite its popularity for international fund transfers, cryptocurrency can also lead to “large and sudden changes in the flow of capital,” cautions the report – a financial stability concern that typically raises caution among central bankers.

“Cryptoassets have so far not reduced but rather amplified the financial risks in less developed economies,” the study, published by the Basel-based Bank for International Settlements (BIS), said, adding that regulating the sector would be preferable to a full ban, given the difficulties of enforcement and risks of curbing innovation.

“The technology could still be applied in various constructive ways,” the study said, adding that regulations will need to “channel innovation into such socially useful directions.”

The emergence of crypto-backed exchange-traded funds (ETFs) has the potential to amplify risks by enabling a broader demographic, including those lacking specialized financial expertise, to participate in the market, according to the report. Notably, in June, BlackRock, the largest asset manager globally, submitted an application to launch a BTC-based ETF tied to the current price of bitcoin in the United States.

The doubt exhibited by international institutions towards cryptocurrencies is a well-established sentiment. In July, the BIS declared that cryptocurrencies cannot function as currency due to their "inherent flaws," and the United Nations' developmental division recommended that developing economies implement comprehensive regulations to mitigate risks to tax collection and monetary policy.

The report reaffirms the sentiments expressed by prominent figures from the United States and the International Monetary Fund. These individuals endorsed a strategy that prioritizes regulation over an outright ban, a stance that was also advocated during a recent G20 roundtable discussion.